UDR's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: UDR, Inc. (UDR)


Q4 2012 Earnings Call

February 5, 2013, 1:00 p.m. ET


Chris Van Ens - Vice President, IR

Tom Toomey - President and CEO

Tom Herzog - CFO

Jerry Davis - SVP, Operations

Warren Troupe - Interim Principal Financial Officer, Senior Executive VP, Corporate Compliance Officer

Harry Alcock - SVP, Asset Management


Derek Brower – UBS Bank

Eric Wolfe – Citigroup

Rich Anderson – BMO Capital Markets

Alexander Goldfarb – Sandler O’Neill

Michael Salinsky - RBC Capital Markets



Good day, Ladies and Gentlemen, and welcome to the UDR fourth quarter, 2012, conference call. (Operator Instructions).

I would now like to turn the conference over to Chris Van Ens, Vice President of Investor Relations. Please go ahead, Sir.

Chris Van Ens

Thank you for joining us for UDR's fourth quarter financial results conference call. Our fourth quarter press release supplemental disclosure package and three-year strategy overview document were distributed earlier today and posted to our website, www.UDR.com. In the supplement, we have reconciled all non-GAAP financial Reg G. requirements.

Prior to reading our Safe Harbor disclosure, I would like to direct you to the webcast of this call located in the Investor Relations section of our website, www.UDR.com. The webcast includes a slide presentation that will accompany our three-year strategic outlook commentary.

Onto our Safe Harbor. I would like to note that statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in this morning's press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions and follow-ups. Management will be available after the call for your questions that did not get answered on the call.

I will now turn the call over to our President and CEO, Tom Toomey.

Tom Toomey

Thank you, Chris, and good morning, everyone. Welcome to UDR's fourth quarter conference call. On the call with me today are Tom Herzog, Chief Financial Officer and Jerry Davis, Senior Vice President of Operations who will discuss our results as well as our senior officers, Warren Troupe and Harry Alcock who will be available to answer questions during the Q&A portion of the call.

To start, I would like to officially welcome Tom Herzog to UDR's senior management team. Many of you listening to the call know Tom. He is a well-respected CFO who possesses a strong analytical skill set and valuable public REIT experience with two S&P 500 REITs. I am confident that his experience will be beneficial to the company over the coming years.

My prepared remarks today will be brief as the majority of my comments will be included in our overview of our three-year strategic outlook, which will directly follow senior management's quarterly and full-year prepared remarks.

2012 was another strong year of operating results and we are encouraged by the early trends that we see in 2013. Let me quickly review why the company is well-positioned and how we will continue to capitalize on good multi-family fundamentals over the years ahead.

First, the heavy lifting with regards to our large-scale portfolio repositioning is complete. Like most every public REIT, we will continue to see some level of capital recycling completed on an annual basis. But any such actions will be conducted through normal business activities.

Second, our balance sheet is much improved. But we will continue to manage the lower leverage over time. In our three-year strategic outlook, we will speak to leverage targets.

Third, we have a topnotch operational platform and a team that we believe will continue to take full advantage of the positive multi-family fundamentals currently available to us.

Finally, we have $1.3 billion of NAV accretive development and redevelopment underway. 50% of this pipeline is currently funded. And 49% will be delivered by the year-end, 2013. These activities are expected to begin contributing to our bottom line later this year. And will generate stronger cash flow growth in 2014 and '15.

In the fourth quarter, we were presented with a challenge related to Hurricane Sandy. However, we were able to successfully navigate these difficulties thanks to the hard work and professionalism of our New York team. We do not believe the storm will have any long-term negative impact on the demand for our Manhattan communities or their valuations. Tom Herzog will delve into more detail in the accounting treatment of Sandy. While Jerry will discuss the pre and post Sandy New York operating trends in the respective prepared remarks.

Overall, we were pleased with our fourth quarter and full-year 2012 results.

Finally, with the closing of 2012, the entire management team would like to thank our 1,600 associates for another outstanding year. The outlook for UDR remains bright. And we look forward to continued success.

With that, I will pass the call over to Tom Herzog.

Tom Herzog

Thanks, Tom.

Before I get into my prepared remarks, I want to express how good it is to be back in the public REIT world and specifically here at UDR. For those of you I have not yet had the opportunity to reconnect or meet, I look forward to interacting with you in the near future.

There are several topics I will cover today. First, changes we have made to our presentation of FFO. Second, our fourth quarter and full-year 2012 FFO results. Third, our transactions and balance sheet update. Fourth, details regarding the accounting treatment of Hurricane Sandy. Fifth, our first quarter and full-year 2013 guidance. And lastly, enhancements we made to our quarterly supplemental package.

Let me begin with the changes we have made to our presentation of FFO. Effective this quarter and going forward, we will be presenting FFO, FFO as adjusted, and AFFO. We will also be guiding the all three of these earnings metrics on a quarterly basis. Unlike our historical presentation, FFO as defined by NAREIT will now be our lead-in metric. And will reconcile the FFO as adjusted, which is equivalent to our previous core FFO. The adjustments for reconcile from FFO to FFO as adjusted will clearly set forth the fully set forth in each of our quarterly releases.

In addition, we have commenced reporting AFFO, which reflects our maintenance CapEx reported on attachment 14 or page 25 of our supplement.

There are three primary reasons for these changes. First was to lead with NAREIT FFO and then reconcile through FFO as adjusted and AFFO for full clarity of the components and adjustments to each of these measurements.

Second, to provide guidance to each of these three measurements to eliminate confusion as to what is included and excluded from our earnings guidance.

Finally, despite inconsistency within the industry, we believe our new presentation more closely reflects that of many of our REIT peers.

Turning now to our fourth quarter and full-year 2012 results, fourth quarter FFO per share was $0.31. Excluding Hurricane Sandy charges, which totaled $0.04, FFO as adjusted was $0.35. And AFFO was $0.31 per share. Full-year 2012 AFFO was $1.32 per share. Excluding the adjustment outlined on attachment two or page two of our supplement, FFO as adjusted was $1.35 per share, 5.5% higher than in 2011. Full year AFFO was $1.18 per share, 10% higher than in 2011.

Third, our transactions and balance sheet. As previously discussed, we completed a swap of ownership interests in certain UDR MetLife I JV operating assets and land parcels in the fourth quarter. Details are included in our quarterly press release.

At year end, our financial leverage on a historical cost basis was 39%. On a market value basis, it was approximately 32%. Our net debt to EBITDA was 7.0 times. And we are comfortably inside of all of our credit agreements and note covenants. We ended the quarter with $913 million of available liquidity per combination of cash and undrawn capacity on our credit facilities.

Next, I will address the accounting treatment around Hurricane Sandy. In the fourth quarter, we recognized a $0.04 charge for Sandy related damages. As I mentioned earlier, this charge was included in FFO, but excluded from FFO as adjusted.

As to the GAAP accounting for Sandy, first, physical damage is accrued in the period event occurred. Second, cleanup costs are expensed as incurred. The recognized loss for both of these items is reduced by the estimated insurance reimbursement. Third, business interruption losses are recognized as they occur. Whereas the recovery of business interruption losses are recognized when repayment is received or assured.

Due to the inherent uncertainty in the recovery of any natural disaster claims, we conservatively accrued a charge of $0.04. $0.02 of which is equivalent to 25% of the physical damage and cleanup costs. And $0.02 attributable to business interruptions. Any subsequent insurance recoveries from this fourth quarter 2012 charges that differ from the accrual will continue to be excluded from FFO as adjusted.

Business interruption losses incurred in 2013 will inherently have less certainty of measurement. Accordingly, we will not add back such losses to FFO as adjusted. And subsequent business interruption recoveries will be included in FFO as adjusted when received to offset prior business interruption losses recognized in the run-rate.

So how does all this affect same-store results? Business interruption losses that consist of rent rebates to reimburse residents during the period the buildings were uninhabitable will be reported within hurricane related charges in the income statement. The related rents were contractually receivable and will remain in rental income so that same-store sales will not be disrupted by this item. This treatment has no net impact to our P&L or FFO. As a result of lower occupancy due to the inability to lease apartments when the building was down, we have decided to delay 95 Wall's entry into our same-store pool until the second quarter of 2014 so as not to distort our New York same-store 2013 results.

Onto 2013 guidance, our 2013 FFO guidance is $1.35 to $1.41 per share. We're expecting $0.02 of our (RA-3) gains from property sales, which results in FFO as adjusted of $1.33 to $1.39 per share, or an increase of 1% at the midpoint versus 2012.

Our 2013 AFFO guidance is $1.17 to $1.23 per share. This includes $1,020 per door of maintenance CapEx per stabilized home. We anticipate same-store revenue growth of 4% to 5%, same-store expense growth of 2.75% to 3.25%, and same-store growth of 4.25% to 6%. Other primary assumptions can be found on attachment 15 or page 26 of our supplement.

You will also notice we now provide quarterly guidance. In the first quarter of 2013, both FFO and AFFO as adjusted guidance are at $0.31 to $0.33 per share. Our AFFO guidance is $0.27 to $0.29 per share. Our 2013 FFO as adjusted guidance is only $0.01 higher than last year. The primary drivers of this low FFO growth includes several items that offset our forecasted 2013 organic [inaudible] growth, which is expected to provide $0.10 contribution to FFO. The offsetting items include $0.035 increase in FFO drag related to our expanded development and redevelopment pipeline, $0.03 from the 2012 and projected 2013 sales of high cap rate properties in non-core markets, $0.01 of dilution in 2013 from our May, 2012 repayment of debt with equity proceeds, as well as a net $0.01 related to miscellaneous other items.

Finally, we made numerous enhancements to our quarterly supplemental document, including how we categorize our NOI, additional data on our redevelopments, development and joint venture platforms, and additional same-store operating metrics, such as turnover and lease related growth by market.

We recognize that our revised supplement in conjunction with our three year strategy document will likely lead to in-depth modeling questions. We ask that you hold these questions until after the call when we can walk them through with you individually in greater detail. We believe you will find our re-tooled supplemental package provides greater transparency and will prove helpful and informative.

We have noted that our guidance is lower than many analysts had projected. In examining these variances as best we can, we observe several drivers to these differences, which include lower interest expense perhaps due to differences in capitalized interest in our development and redevelopment projects and lower G&A perhaps due to confusion relative to the tax provision as presented in our historical financial statements. We believe our improved supplementals will help reduce confusion in the future.

With that, I'll turn the call over to Jerry.

Jerry Davis

Thanks, Tom. Good morning everyone.

In my remarks, I will cover the following topics. Fourth quarter and full year 2012 operating results, an update on our non-mature pool of assets, and lastly, an update on our New York operations.

We are pleased to announce another strong quarter of operating results. In the fourth quarter, same-store net operating income grew 7.3% driven by a 5.7% year-over-year increase in revenue and only a 2.3% increase in expenses. A quite note, on attachment six or page eight, our revised quarterly supplemental package, you will find a breakout of same-store operating expenses with year-over-year sequential and year-to-date comparisons by expense component.

Our same-store revenue per occupied home increased by 5% year-over-year to $1,420. While same-store occupancy increased by 60 basis points to 95.8%.

On a total portfolio basis including our pro-rata share of JVs, our revenue per occupied home was $1,558.

Sequentially, fourth quarter net operating income increased 3.3% driven by a 0.7% increase in revenue and expense growth of -4.7%.

Before I discuss new and renewal lease growth trends, I would like to direct everyone to attachment 8G on page 19, a new addition to our supplemental quarterly package. 8G provides new and renewal lease growth as well as turnover by market. In the fourth quarter, effective rental rate increases on new leases at our same-store communities increased by 1.7% on average. And renewal rate growth remained strong at 5.6%.

Full year turnover in 2012 increased 180 basis points year-over-year to 55%. This was a function of our ongoing push to optimize revenue growth through the seasonally stronger demand periods earlier in the year.

In the fourth quarter, annualized turnover reverse course declined by 40 basis points year-over-year. We elected to hold occupancy higher during this seasonally slower period by pricing our renewal increase slightly less aggressively, which yielded dividends and positioned us for strong lease growth in 2013.

Attachment five or page seven of our quarterly supplemental package has some changes that I would like to briefly review. You will notice that we have added an NOI bucket title stabilized non-mature. Only non-stabilized communities are now included in our acquisition, development, and redevelopment NOI buckets. We also broke out our non-residential and other, which includes commercial NOI. For more information on how we define our respective NOI buckets and what types of communities are included in each, I will refer you to attachment 16 on pages 27 to 29 of our quarterly supplemental package.

Our stabilized non-mature communities account for 47% of our total non-same-store NOI excluding JVs. And are primarily located in our core markets. These communities posted sequential revenue growth of 0.8%, ten basis points better than our same-store portfolio. And NOI growth was 5.1%, which was 180 basis points better.

Moving onto New York and the effects of Hurricane Sandy, as Tom Herzog indicated in his remarks, we have decided to delay 95 Wall's entry into our same-store pool until the second quarter of 2014 as a result of the hurricane.

21Chelsea will still enter our same-store results in the first quarter of 2013 as it was only minimally affected. 10 Hanover Square, our other downtown Manhattan community will remain in our same-store pool as it was also minimally affected aside from the rent rebates we gave while it was uninhabitable for two to three weeks.

Before I review fourth quarter leasing trends in New York, I would like to address any potential long-term negative ramifications to downtown property values. It is still early in the process. But we do not see any long term value impairment. Our resident's property was not damaged by the storm. And leasing activity is following the normal seasonal patterns. People still want to live in lower Manhattan.

Let me address where we stand today versus before Sandy from an occupancy and lease rate perspectives at our New York properties. First 10 Hanover with 493 homes, our pre-Sandy occupancy was 98%. And our current occupancy is comparable. Blended lease rate growth is also comparable to pre-Sandy levels.

Second, 95 Wall with 508 homes, our pre-Sandy occupancy was 96%. And our current occupancy is 92%. 95 Wall was the community most affected by Sandy. Blended lease rate growth still has some room to run before it returns to pre-Sandy levels. However, we are making progress on refilling the building. And would expect business as usual by the end of the second quarter.

Third, Rivergate with 706 homes, our pre-Sandy occupancy was 93%. And our current occupancy is 88%. This decline was partially driven by our redevelopment program. When Sandy hit, we had a certain number of units being redeveloped. Our crews could not work on these units for the weeks when Rivergate was uninhabitable. In the meantime, we had already sent out notices prior to Sandy to free up the next batch of homes to be redeveloped. Those residents vacated when Rivergate became habitable again. This gave us an abnormally large number of homes in redevelopment, which negatively affected occupancy. Blended lease rate growth has not yet returned to pre-hurricane levels at Rivergate. But we have also not had many redeveloped homes come back online since the storm hit. We expect improved lease rate growth by the end of the first quarter. To reiterate, we believe that we will be back to pre-hurricane occupancy and lease rate levels by the end of the second quarter in New York.

I'll not turn the call back over to Tom Toomey.

Tom Toomey – President and CEO

Thanks Jerry, and let’s move into the strategic portion of the call, and with that I’d asked that you pull up the link either in the press release, and/or from our web site as we’re going to go through a PowerPoint presentation page by page with you.

Since announcing our attention to present a three year strategic outlook, we have fielded a number of inquiries as to why. UDR is a very different company than it was three years ago. Our portfolio and balance sheet have undergone major renovations, now that these activities are largely complete, it is prudent to explain where we intend to take the company over the next three years, and why our stock is, and will continue to be a great investment. With that, let’s begin on page three of the presentation, and quickly review our 2012 highlights.

The large scale aspect for portfolio repositioning are complete. We dramatically reduced our leverage, our balance sheet is in good order, and we remain committed to lower leverage model. We successfully navigated the aftermath of Sandy. Tom Herzog joined us as our new CFO.

Jerry’s operating platform and team continue to post strong results. Our consensus NAV per share was up 4% year-over-year, and our annual dividend per share increased 10%. And we expanded our JV platform and grew our development and redevelopment pipeline.

On page four you will see our strategic priorities. In short, we are focused on allocating capital creatively, further reducing our financial leverage over-time. Growing cash flows to support dividend growth, and incrementally improving the quality and market mix of our portfolio.

As we successfully execute on these strategic items, NAV and dividend growth will follow. Which we expect will drive strong long-term total shareholder return.

Let’s first look at capital allocation on page five. At the top of the page you will note our pillars of capital allocation. First; Invest in NAV accretive opportunities, and second; weigh investment opportunities against our leverage metrics and funding alternatives.

We have created a significant amount of value, or approximately 450 million through our investments since 2010. As you can see from the graph in the middle on this page, this is true for your New York City communities as well.

In addition to the NAV generated by our higher growth portfolio, we anticipate creating roughly 450 million in value through our development and redevelopment growth efforts over the coming years.

Next Tom Herzog, will take you through our view on the balance sheet management on page six.

Tom Herzog – CFO

Thank, Tom. As indicated at the top of page six, we look to a wide range of balance sheet metrics, as well as our maturity schedule when considering how to best manage our balance sheet. We are comfortable with the current state of our balance sheet, but importantly we are establishing targets for a balance sheet metrics.

We tend to manage to leverage of 35 to 40% and target the lower end of this range over time. However, we will not engage in diluted activities to accomplish our subjective. On the net debt-to-EBITA basis, we’re managing to 6.0x to 6.5x over time. [Inaudible] for these goals will not be linear.

Looking further down the page, you can see how we have dramatically strengthened our balance sheet over the past three years. We remain committed to a lower leverage model, and further improvement in our balance sheet metrics as anticipated by year-end 2015.

One note with regard to our balance sheet metrics this year; it is likely that our metrics will increase in the first half of the year, as we continue to fund our development and redevelopment pipeline. We anticipate that net debt-to-EBITA will be near 7.5x, and leverage near 40% during the first half of 2013. After that, our metrics will trend lower at 700 million of current (NOI) below income producing assets begin to cash flow in the second half of 2013, and accelerate in 2014.

Onto page seven, where Jerry will comment on our operations.

Jerry Davis – SVP, Operations

Thanks, Tom. We as a company remain intensely focused on operations. This is critical because operations drive cash flow, which allows dividend growth. As you can see, we have generated operating results stack of well versus our multi-family peer group over the past five years.

Some of our out-performances resulted from our first [inaudible] manage with regard to technology initiatives. Examples include our electronic resident platform, our online portal, and online renewal leasing. We continue to be big believers in technologies that increase our portfolio efficiencies, and more importantly enhance customer satisfaction. We will continue to invest in this area.

Looking ahead, we expect the top and bottom-line growth will remain robust and drive cash flow through 2015. Some of this will be the result of new technology, such as online new leasing, as well as advancements that derive greater efficiencies throughout our cost structure.

Turning to page eight, I will discuss our improvement portfolio. At Toomey spoke to earlier, the heavy lifting with regard to our portfolio repositioning is complete. However, like every [inaudible], we will continue to recycle capital into NAV-accretive opportunities through normal business activities.

But some level of capital recycling will always be going on. A majority of our current NOI is generated by our target markets in our West, Northeast, and Mid-Atlantic Regions. These regions will continue to grow as we deliver our development and redevelopment projects.

Please note, that our expectations for our year-end 2015 NOI concentrations, do not include any capital recycling between now and then, or any further development or redevelopment beyond what is currently started. As such, these estimates could prove conservative, as any capital allocation activities will target our core markets.

Turning to page nine, Tom Toomey, will comment on our thoughts concerning value creation.

Tom Toomey – President and CEO

Thanks, Jerry. Generating strong total shareholder return over the long-term remains our primary goal. To achieve this, we focus on growing our NAV per share, expanding our stock price premium, and/or reducing our stock price discount to NAV, and growing our dividend.

One of the primary metrics we focus on to assess whether we are creating value is CVNI growth, which calculates all-in NAV per share growth, after our dividends are theoretically reinvested at our NAV per share at the time of payment. This metric is highly correlated with long-term total shareholder return.

On page ten, we’ll address our development and redevelopment pipeline, an important component of value creation in the coming years.

As you can see, we have a 1.3 billion pipeline concentrated in our core markets. A majority of that will come online by the second half of 2013, and begin to cash flow at that point. Currently, however, hour pipeline represents a drag on our FFO per share growth. I will let Tom Herzog address this.

Tom Herzog – CFO

We have mild development and redevelopment projects and quantify the expected FFO accretion, NAV creation, and FFO drag. Assuming we maintain our pipeline at 1.0 to 1.5 billion, deliver 500 million of new product annually on average, in current development/redevelopment economics hold, our pipeline should be approximately $0.03 to $0.04 accretive annually, the FFO and AFFO per share.

Under the same assumptions, we anticipate that our pipeline will contribute $0.60 to $0.85 of NAV annually moving forward. Assuming no additional starts are in process development or redevelopment creates a drag on our FFO per share of $0.055 in 2013, $0.4 in 2014 and $0.1 in 2015. As we have been fully [inaudible] pipeline for the last few years with harvesting little to no cash flow during this development period.

Turning to page eleven, and our joint ventures. We like our joint venture partnerships and platforms. They represent a stable source of long-term capital, and can enhance economics. As you can see, our joint venture relationships are extensive, and we have created significant value through our joint venture investments. JVs will remain a part of a long-term value creation strategy.

Turning to page twelve, we provide an overview of our 2013 to 2015 expectations. We are not economists; therefore we look to our third party research providers from Macro Economic Expectations such as job growth, household formations, and multi-family specific data. These assumptions are available at the top of the page.

We outlined our 2013 guidance earlier in the call. Our cumulative primary growth expectations for the 2014 through 2015 period are as follows: The FFO per share growth of 12 to 15%. FFO has adjusted per share growth of 14 to 18%. AFFO per share growth of 16 to 20%. Same-Store revenue growth of 7 to 9%. Same-Store expense growth of 5 to 7% and Same-Store NOI growth of 7 to 11%. Again, over cumulative metrics.

Additional details can be found on this page, as well as in the appendix of this document beginning on page sixteen.

Before moving on, I would like to provide some observations regarding out 2013 FFO per share guidance. During the three year period from 2010 to 2012, we purchased 1.97 billion of assets and an average Cap rate of 4.7%. We sold 1.22 billion of assets and an average Cap rate of 6.9%. We grew our development and redevelopment programs to 1.3 billion 50% of which has been funded and deleveraged for a balance sheet by fully funding all external growth activities of equity. Note that this 2.21 billion of equity was issued at a slight premium to NAV per share over this time period. And at our 3.4 billion of on balance sheet debt at year-end 2012, was very similar to our end-of-year debt balance in 2009.

In total, these activities will be roughly $0.14 diluted to our 2013 FFO, and AFFO per share, which is clearly impactful when compared against our $1.20 of expected AFFO in 2013 at the mid-point.

Let me provide you some context as to how we arrived at the $0.14. Matching our three year acquisition against deposition yielded $0.10 of dilution. And ramping our development and redevelopment pipeline contributed another $ 0.055 of total dilution in 2013. This was offset somewhat by a portion of a new equity we issued, that was used to fund part of our fully owned joint venture and land acquisitions. This created $0.02 of accretion.

The team was fully cognizant of this tradeoff between short-term dilution and long-term value creation when we undertook these activities.

With these now behind us, our already superior operating platform, has been successfully augmented with a much improved portfolio that has built for the long-term. A four to five balance sheet and a accretive development and redevelopment program that are well positioned in all areas for growth in 2014 and 2015.

Turning to page thirteen, Toomey will address what makes UDR unique.

Tom Toomey – President and CEO

First we are large enough to enjoy cost of capital and G&A economies to scale. But still nimble enough that moderately sized value creative opportunities moved the needle.

Second, we have a good market mix and range of asset quality that does well in a variety of economic scenarios.

Third, our operating platform is second to none. Timely, we have an extensive long-lived and stable joint venture relationship with high quality dedicated partners. These serve to lower our effective cost-to-capital and boost our returns.

Lastly, please turn to page fourteen. So why invest in UDR? As you can see, we believe that there’s plenty of reasons starting with multi-family fundamentals continue to look robust. We have a strong three year growth profile, which is driven by our efficient operating platform, and our repositioned portfolio. The heavy lifting is completed with regard to our portfolio and balance sheet repositioning, as well at the ramp up of our development and redevelopment programs.

And lastly, tax flow and NAV per share growth from our external growth efforts will begin to come online towards the end of 2013, and accelerate over the next few years.

As Herzog mentioned earlier, our FFO and AFFO per share growth, would be rather marginal in 2013. However, in 2014 and ’15 cash flow growth is expected to improve markedly to roughly 9% annually.

Quickly, here are the primary big picture assumptions that support these growth expectations during this time period given the current economic conditions. Our projected Same-Store NOI growth of roughly 4.25 per year would result in additional FFO and AFFO growth of 5 to 6% per year. Development/redevelopment coming online during this period are forecast to add another 3 to 5% growth. And remaining non-Same-Stores is anticipated to add approximately 1% per year. When combined, and set against our current leverage, our average 2014 and ’15 FFO and AFFO growth per share of 8 and 9% respectively look very reasonable. These growth levels would result in 2015 FFO and AFFO of $1.57 and $1.41 respectively. Applying these same forecast to UDRs consensus NAV of $26.50 per share yield annual NAV growth of roughly 9% in 2014 and ’15, and would result in NAV per share north of $32.00 by the end of 2015.

This projected NAV increase when coupled with dividends expected to be paid in 2014 and ’15, would generate CVNI growth of roughly 12% annually.

We will continue to work hard and execute on all the strategic priorities that we have reviewed with you today.

Finally, and most importantly, we remain focused on managing our business every day to drive total shareholder return for investors and believe that we have the right team and plan in place to do so.

With that, operator, we’ll turn the call over to Q&A session.

Question-and-Answer Session


(Operator instructions). Our first question comes from the line of Derek Brower at UBS Bank. Please go ahead.

Derek Brower – UBS Bank

Hi, thanks, guys. Good afternoon. I was wondering if you could just give us a better handle on the timing of store uses for 2013, and more specifically, the thought behind issuing 100 million of equity below NAV as compared to selling some more non-core assets?

Tom Toomey

Well, the sources and uses, just if you were to take them and run them down. So we’ve got – I’ll just give you the [inaudible] real quick like. We’ve got the surplus of FFO versus dividends of 68 million, the dead issuances, equity issuances that you can see from the guidance, the wholly-owned disposition; it comes up to about $700 million in sources just roughly. We’ve got some debt maturities; we listed development and re-development spending, about $750 million, that’s how it balances out.

When we think about the equity issuance, I would describe it this way. We’ve got a number of different sources of capital so we could employ. It could be – it could be dead, it could be equity, it could be joint venture, proceeds, et cetera. So whether we choose to issue that 100 million of equity or not is yet to be determined. So I would say that it’s very possible that we could, it could be a bigger number, it could be a smaller number depending on market circumstances.

Derek Brower – UBS Bank

Okay, thanks. And on the capital recycling front, can you describe what the appetite from that life is to do more asset-swap transitions such as the Olivian and do you think it could be possible we’ll see another one of those transactions this year?

Warren Troupe

Hi, this is Warren Troupe. We’re always in discussion with Met Life and we’ve said from the beginning, we like that joint venture, it’s a way for us to increase our ownership interest in those existing assets and I think as you see us go along, you’ll see us continue to execute those transactions with Met Life and also increase the size of Joint Venture II.

Derek Brower – UBS Bank

Okay, thanks. And then I guess, just lastly, big-picture question and just going back to your Page 12 macro assumptions. At the top, you know, you have job formation growing in 2013, 2014, income growing, household formations growing, but it claims that your assumptions assume homeownership rate actually declines from 2013. I’m just wondering if you’ve done any sensitivities on your 2014 to 2015 outlook based on a growth homeownership rate?

Tom Toomey

This is Toomey. With respect to the assumptions on ’12, those are national assumptions and we’ve looked at our individual markets when we’ve thought about ’14 and ’15 and believe that the homeownership rate in those markets unappreciablely moved more than where it is today.

Derek Brower – UBS Bank

Okay, thank you.


And our next question comes from the line of Eric Wolfe with Citigroup. Please go ahead.

Eric Wolfe – Citigroup

Hey, guys. The topic of stock repurchases came up on the call earlier today. And obviously on a lot of calls over the last week or two, there’s been some discussion about the property REIT trading at large discounts to NAV. So my question is, is whether you think there’s anything UDR can do to be more active about trying to close out this discount? Obviously, part of the strategic outlook, which seemed to be part of that, but are there other things that you can do in the short term or medium term to help close out the discount?

Tom Toomey

This is Toomey. I think you’re right. One of the first things is provide a strategic outlook and this document does a fine job on that. The second aspect is the enhancements of our disclosure in the quarterly package so that people can drill down to the value of the enterprise more easily. And I think the third is just execution on our part and that we’ve got a good experienced team. We feel like we’ve got the right assets, the right balance sheet, the right growth opportunities. It’s just time to execute. And so I think we’re going to focus on those three and see how far they take us and then we’ll evaluate it at that point and see where we move.

Eric Wolfe – Citigroup

Okay, that’s fair. And then I think Michael had a follow up.

Michael (Unidentified Analyst)

Yes. Tom, just thinking about how you ended your comments, thinking about the growth in NAV and technically the growth in NOI getting to a $32 stock price, or $30 NAV I should say. I guess underlying that is an expectation of flat cap rates, right?

Tom Herzog

Well, no, not necessarily. Let me just give you the pieces, Michael. How we looked at that – this is Herzog, by the way. How we looked at that analysis is we took the same store growth to get the – the NOI will be created from the guidance that we put in the document. We also looked at the non-same-store and then we picked up our development REIT development value creation from an NOI perspective that would be created from the program that’s in place and projected that over about three years in a pretty in-depth model. We took that NOI and we capped it out at – you’re correct, at today’s CAP rate so we could get a sense for it and then incorporated that into our NAV creation to get the growth that would just mathematically come to something north of $32 a share.

And the while we were at it, we did then pick up the dividend yield off the consensus NAV and created the CVNI that we spoke to of about 12.2%. The CAP rate that we used was the – it was 5 1/8% and we picked that up from looking to the consensus NAV that The Street had put out and kind of the average CAP rate that was within that mix to utilize the 5 1/8th.

Michael (Unidentified Analyst)

And so effectively, you know, flat CAP rates and growing NOI, you know, getting to that NAV, obviously, is predicated on CAP rates staying relatively stagnant?

Tom Herzog

You’re correct. And in addition to that, the growth from the development and re-development program.

Michael (Unidentified Analyst)

And then at least in the ’14 to ’15 timeframe, you have this – call it 500 million of equity being issued. This is on Page 12 of the presentation. I guess, is that a similar answer thinking about the 100 that’s embedded in guidance for ’13, that the 500 in ’14 and ’15 is predicated on the stock because you’ve now put yourself, I guess, out there saying you will not issue equity below NAV and given the stocks at $23, you’ve got a far way to move up, especially with an outlook that the NAV is going to grow significantly in the next couple of years, that that 500 million has got to come from other things, or you don’t spend the money, right? You either don’t do the acquisitions or you don’t do the development or re-development because you’ve got to come up with $500 million of cash?

Tom Herzog

That’s correct. It would be – the activity that would take place will be, in part, dictated by access to various sources of capital. So depending on what those look like, obviously, that can impact the plan.

Michael (Unidentified Analyst)

All right, and you’ve embedded in your forward plan issuing equity at NAV, in that timeframe to grow NAV per share?

Tom Herzog


Michael (Unidentified Analyst)

Okay. All right, thank you.


And our next question comes from the line of Rich Anderson with BMO Capital Markets. Please go ahead.

Rich Anderson – BMO Capital Markets

Thanks. Good afternoon and welcome, Tom Herzog.

Tom Herzog

Thank you, Rich.

Rich Anderson – BMO Capital Markets

Does your balance sheet management slide on Page 6 of the 2015 Outlook include newly-started development activity?

Tom Herzog

No. The balance sheet that we put in place, the balance sheet management as well as the development, redevelopment, value creation, drag, et cetera do not assume new development projects put into play.

Rich Anderson – BMO Capital Markets

And yet on the summary page on Page 12, you do assume incremental development spending. So like isn’t there like a kind of disconnect between your balance sheet and your 2014 expectations without that missing variable?

Tom Herzog

I would say that the balance sheet, just looking at where those metrics fall out to at least freeze that as to what the portfolio looks like today. It gives us a good feel for what those metrics will look like. And then again, depending on what circumstances look like if we go to the development or re-development program. Those sources of funding will need to come from somewhere, which we’ve set forth. And with that, it would keep the metrics, I think, in line based on the mix that we would use. That would be the intent.

As you noted, we set up a target of 35 to 40% leverage, which drives a certain net-debt to EBITDA with the intent of managing toward the lower end of that range, but without doing so on a diluted basis. So that all comes into play in the way that we think about how the model comes together.

Rich Anderson – BMO Capital Markets

Okay. Turning to more current things, on the current list of joint ventures that you have outstanding – this question is for anybody. What’s the lifetime of these joint ventures in your mind? Like when do you think there will have to be some type of event for them to demonetize one way or the other?

Tom Toomey

This is Toomey, Rich. Good morning. With respect to the lifecycle of the joint ventures, obviously, the Met platform, you’re talking about a generational Fortune 50 company that looks at real estate as a long-term hold and a key part of their overall management of their portfolio and our desire is to grow that real estate holding.

With respect to KFH, certainly it is an investor who has come in and out of the United States from time to time and probably at this point in time would still be looking to grow its platform in the U.S. So I don’t believe there’s any finite date that that would terminate.

And lastly is the Texas joint venture. I think their key date will be when the debt, which is slightly above market at 5.5 today burns off in ’15, 2015. That, most likely, would be a date that we’ll make a decision with our partner about those particular assets.

Rich Anderson – BMO Capital Markets

Okay, last question for me on the same-store NOI outlook of 4 ¼ to 6, you’re pretty wide, I guess, but you know, maybe not so much for the start of the year. But what factors would have to happen for you to be closer to the low end? And what are some of the catalyst for you to get at or above the high end of that range?

Jerry Davis

Rich, it’s Jerry. I would say it’s all really dependent mostly on job growth. I think the expenses for the most part, we know what real estate taxes are going to be and I think the rest of our expenses we’re typically good a locking down so I feel good about the expense growth guidance we gave.

On the revenue side, like I said, I think it’s totally dependent on job growth or job loss. If I had to pick two markets that could shift on me quickly, one would be Washington D.C. could probably get worse given the Pentagon’s announcement last week about eliminating 46,000 jobs and furloughing for one day a week a couple 100,000 more. And then on the positive, you know, I could see a place like San Diego having an uptick if some military rotations go towards the West Coast. But that’s really the biggest factor.

Rich Anderson – BMO Capital Markets

Great. That’s all I have. Thank you.


And our next question comes from the line of Alexander Goldfarb with Sandler O’Neill. Please go ahead.

Alexander Goldfarb – Sandler O’Neill

Yes, hi. Good afternoon, or good morning out there. Jerry, the first question just picks up on the expense side. Your guys’ expense guidance is meaningfully lower than peers. It’s also quite a tight range. I understand that over the past several years you guys have been good about keeping expense growth low, but, you know, what do you think is different about, you know, some of the things that you guys have in your numbers that some of the other guys maybe don’t? Is it literally that just the way the properties lay out you’re not seeing the same real estate tax structure or just maybe better on the insurance front? It’s just strickenly a lot lower.

Jerry Davis

Yeah, I can’t really speak to anyone else. I’m not sure what’s behind their numbers. I can tell you though, we are feeling real estate tax pressure, maybe not as much as the Sunbelt-dominating guys, but you know, our taxes – we’re expecting to be north of 8% growth. But when you really look back, like you said, over the last five years, we’ve done a pretty good job of keeping expense growth at sub-1%. So migrating it up to that mid-point of 3% is predominately driven by taxes. We think turnover this year will probably be roughly even where it was in 2012. And you know, we’re really – we spend the last four to five years making our sales force and administrative functions more efficient. And over the next couple of years, we think there’s ways to realize efficiencies in our service functions of our business. So we’re going to be hitting that hard over the next 2 to 3 years.

But yeah, I think when you look at it, it’s really maintaining control and driving down the cost of doing our service side of the business will help keep us at the low end.

Alexander Goldfarb – Sandler O’Neill

Okay. So if I understand you, I mean, in addition, presumably, Warren’s doing a good job on negotiating with the insurance companies to keep premiums low, but essentially whatever costs you’re seeing rise on property tax, you’re sort of taking it out on the other side by keeping expenses down? That’s the takeaway?

Jerry Davis

Yes, I think that accurate.

Alexander Goldfarb – Sandler O’Neill

Okay. Second question is for Toomey. Obviously, you know, Tom Herzog doesn’t need an introduction, you know, we all know him. But just sort of curious given it was a lengthy process, it was one that you guys weren’t under pressure to have to fill right away, you know, given the existing CFO bench strength there. What was the Board’s take in view as far as succession planning? I mean, if we think about it, succession planning is something that can take four or five-plus years. You know, I know that you comment that you’re not ready to hang up the spurs anytime in the near term, but these things do take time. So just sort of curious what the Board thought as you went about filling that role?

Tom Toomey

Well, the Board was part of the process, obviously. And with respect to the subject of succession, you’re right, Alex. First, I’m 52 years old. I like what I’m doing. I like the team I’ve assembled. I enjoy what I’m doing so annually we review a succession plan, the Board approves it and we march forward with that plan every year and evaluate it every year.

Alexander Goldfarb – Sandler O’Neill

Okay, so nothing changed when you sent about doing the search? It was – that didn’t prompt a further review of anything as far as succession goes?

Tom Toomey

It was part of the evaluation process and we reached the conclusion that Mr. Herzog was the best candidate today and for the future.

Alexander Goldfarb – Sandler O’Neill

Okay, perfect. Thank you.


And our next question comes from the line of Michael Salinsky of RBC Capital Markets. Please go ahead.

Michael Salinsky - RBC Capital Markets

Good afternoon, guys. I also appreciate the disclosure there in the three-year plan. Just a couple quick bookkeeping questions. First, you gave what you expect to spend in 2013. What’s kind of the outlook for development starts and redevelopment starts in ’13?

Harry Alcock

Mike, this is Harry. We didn’t give any guidance as to starts in 2013. In ’14 and ’15 we have to start another – call it 500, 550 million to sort of reach the guidance that we’ve given and so 2014, 2015 spend. I can tell you that our existing pipeline, both in our owned land assets and our JV assets with Met Life, the total spend in that portfolio could be in excess of $1 billion. We’ve got additional redevelopment projects we’re looking at. So we certainly have a sufficient pipeline to backfill the existing projects.

In terms of 2013, we didn’t give any guidance. I’d be surprised if we started a lot, although we’re working on a number of projects and the exact timing depends on when we complete the entitlements and permitting process with the various cities.

Michael Salinsky - RBC Capital Markets

Okay. Jerry, in your prepared comments, did you give January trends?

Jerry Davis

I didn’t, but I will. January, our new least rates were up – or rates on new leases were up about 2.5%, that compares to 1.7% last January. And then our renewals were up 5.9% in January and that’s down from last year when it was pushing 7.

Michael Salinsky - RBC Capital Markets

Okay. And the occupancy on the year-review basis?

Jerry Davis

Occupancy is up slightly in January. Today, I think it averaged out 95.5 in January and today we’re at 95.4%. I would expect for the first quarter it will end up in that 95.5% range.

Michael Salinsky - RBC Capital Markets

That’s helpful. And just finally, the G&A increase looked a bit large. Tom could you walk through the components of what drilled the increase there in G&A?

Tom Herzog

Yeah, Mike, Tom Herzog here. The G&A, first of all, I don’t want you to be confused by the G&A. We have said in the past that some of that occurred. The tax number used to be met into that and then in the beginning of last quarter when people realized there was confusion here, that was discontinued. So now the G&A and the tax benefit are broken out separately, which you’ve probably seen. So when we look at the 2012 G&A relative to the guidance that was given at the beginning of the year, you’ll find that the tax number is broken out, that we’re pretty much right on in that number.

As we look to 2013, we’re up – call it 2, $2.5 million, this is the basic stuff. We’ve got normal personnel increases. We had certain comp items for folks in the field that had a great job in 2012 and then miscellaneous and technology type items make up the rest. So no big [inaudible] and line item made up that change, but it comes to about a penny.

Michael Salinsky - RBC Capital Markets

Okay. I’ll take a look at that. The tax benefit then, I just – it’s been elevated the last couple of years. Is the – looking forward over the next couple of years given your outlook, should we expect that to come down pretty substantially as you kind of move out of that business?

Tom Herzog

Well, I would put it this way; in 2012, the first quarter of ’12, there wasn’t a benefit recorded because the sales hadn’t been made and it was being backed off against the valuation allowance adjustment that took place. In 2013, so it was running about $3 million a quarter in ’12 with nothing in Q1. In 2013, that number is going to be more in the vicinity of ’11 to ’13 million. And then as we go forward from there as some of the development projects start to stabilize and some of the additional sales start to earn in, you’re going to see that tax benefit structure decline and that’s what you see in that guidance on Page – whatever it is, 16 or 17 of the three-year strategy package, you see a decline for those reasons as development starts to earn in.

Michael Salinsky - RBC Capital Markets

Appreciate the color. Thank you.

Tom Herzog

I should just note one thing though so that we don’t have confusion, we’re not intending to move out of that business in the TRS. We’ll continue to own assets in there, develop assets so that tax benefit is an ongoing item and you can see the that [inaudible].


Mr. Toomey, there are no further questions at this time.

Tom Toomey

Well, thank you, all, for your time today. I know it was a lengthy prepared remarks, but I think we have a lot to give you today and certainly the team’s going to be available for follow-up calls. But as you can see today, what we have accomplished is we provided a three-year road amp. We’ve enhanced our disclosures. We restated our strategic priorities. We certainly gave you a case of why UDR is a good investment today and in the future. And lastly, I add, I think we have the right team to execute this. So with that, thank you for your time today and we wish you the best.

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